If you’re a fiduciary worried about potential liability, be warned. Commodities trading remains speculative and may not be appropriate for unsophisticated investors – no matter what the TV tells them.
Due Diligence
The wildness of the equity markets and the uncertainty of our economic environment appears to be opening the eyes of the typical fiduciary to more exotic investments. The practical implication may mean greater potential liability.
The active investing vs. passive investing argument has become passé. Perhaps we may be nearing a new consensus where it’s no longer active OR passive, but active AND passive.
Investors have decided to flee two asset classes: stocks, perhaps because of their dramatic gains in the last six months; and cash, perhaps because of historically low interest rates. In either case, investors have signaled their lack of confidence in a near term recovery in the American economy.
Diversification does not protect the investor when the entire asset class sinks. A recent study from Hewitt Associates suggests events may be placing plan fiduciaries in a historically precarious position.
A written Investment Policy Statement can act as the cornerstone to regulatory and legal compliance. With this written IPS, the fiduciary has documented the justification of the appropriateness of the institution’s mission and investment objectives. From this, the fiduciary can better evaluate and monitor the institutional fund’s investment performance. Finally, the written IPS may act as a safeguard to reduce fiduciary liability.
The Arizona Republic, reporting on the Profit Sharing/401k Council of America conference in Scottsdale last week, wrote “many experts see rising use of annuities as the next innovation” in 401k plans. Who were these “experts?” Annuity salesmen?
Does creating an Investment Policy Statement (IPS) reduce fiduciary liability or augment it? Though there’s no clear agreement on this matter, the DOL has long maintained it has greater concern for processes than outcomes. Benefits attorneys often view memorializing the process through an IPS and documenting its successful implementation as the surest way to reduce fiduciary liability.
